Bridging loans are a type of short-term funding that can be used to finance an interval between two transactions, such as buying a new property while waiting for another to sell. Before sourcing a bridging loan you need to do your homework and consider a lot to ensure that this huge decision is in your best interest. Here are four things to know before sourcing a bridging loan.
1. The Ins And Outs Of Bridging Loans
A bridge loan gives you the funds you require to finance a brief gap in your cash flow and property dealings. You can take one out for several reasons, most commonly to purchase a new property while awaiting proceeds from the sale of another to complete. You can also take out this loan as a capital injection for your business or use as a quick source of fund to buy a property at auction while awaiting the approval of a standard mortgage.
Experts recommend fully researching bridge loans before applying, particularly if you are a first-time application. You should know the range of interest rates available to you before applying. You will mostly discover that bridging loan interest rates are higher compared to an average long-term loan. In addition to the interest rates, you should always have an understanding of the potential fees associated with a bridge loan.
2. Have A Solid Repayment Plan
Bridge loans are a short-term type of funding and you will typically be required to repay within 12-24 months. Depending on your situation you can pay back what you owe in different ways, including:
- Sale of the property;
- Refinancing with another bridging loan or development finance (this is mostly appropriate for refurb/development scenarios) to extend the loan term to provide time to complete the build, or to allow more time to sell;
- Arranging a longer term finance solution such as a traditional mortgage.
Due to their higher rates, it is prudent to be sure about your repayment ability before applying. You should be certain that you can pay back the loan amount in full with interest and extra fees.
3. Determine Your Exit Strategy
As well as being certain about how to repay your loan, you will also need an exit strategy with a defined end date when applying. It may seem like the best solution is to choose the briefest repayment term possible to lower your interest payments. However, be cautious about this because you should consider possible delays in accessing the money you intend to use to repay your bridge loan. For instance, if your existing home sale stalls, you may default on the loan and incur penalties.
4. Get Professional Advice
It is always best to consult a bridging loan broker like Finbri or another trusted provider to obtain clear professional advice, particularly if you are a first-timer or your situation is complex. These professionals will give you the best advice and help you get the best deal possible.